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Will Senior Housing be Creatively Destroyed?

The oldest Baby Boomers will reach 85 years of age in 2031, and subsequent decades will see a rapid aging of the American population. Boomers, of which 76 million were born, transformed nearly every product or market they ever touched. Housing is and will be no exception, yet this is not an “if you build it, they will come” period for age-restricted property sectors. We can look to senior housing to see why.

My recent article in Business Economics, “The price elasticity of senior housing demand: is it a necessity or a luxury?,” finds that today’s senior housing residents - largely members of the Silent Generation - are quite responsive to changes in price. A price decrease more than proportionally attracts new residents. In contrast, price increases more than proportionally discourage new residents. While this certainly has pricing implications, it also reveals two things about senior housing consumers. First, their bargaining power is stronger relative to providers. Second, senior housing is viewed as more of a luxury than a necessity. Put simply, it’s a competitive market with discerning consumers who are confronted with choices.

For profitability in competitive markets, differentiation is existential. No doubt, the personal care and needs-based elements of senior housing are necessary conditions for success. Necessary does not imply sufficient, so winning on the lifestyle- and services- elements is the sufficient condition for success. Even though differentiation carves out and protects market spaces, sales of products in mature markets are only replaced at a rate equal to the growth in new demanders (Levitt 1965). For senior housing, these new demanders are increasingly becoming the youngest of the Silent Generation and the oldest of the Boomers. As demand changes, so must supply. In other words, senior housing will have to evolve.

Evolution is not a new process. Charles Darwin published On the Origin of Species in 1859. One could say that evolution is as old as the Big Bang. In commerce, economist Joseph Schumpeter described it as “creative destruction” in 1942. Creative destruction is a process where some innovation creates a new way of doing business. Innovators win and earn superior profits by discovering new consumers, products and services that meet their needs, and new ways to meet consumer needs. Imitators notice and imitate. Markets become competitive again, and the cycle repeats itself.

Will senior housing be creatively destroyed? At some point, certainly, but this is not the important question. The important question is whether or not senior housing will innovate or imitate. Both innovators and imitator’s are rewarded, but the returns to innovation are preferred because the innovator is in the driver’s seat and sets the pace. The innovator leads.

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